The distribution-inflation nexus

This paper studies the effect of inflation on poverty in a large cross-country panel dataset of 155 countries observed from 1970 to 2024. We estimate two-way fixed effects models that control for economic growth and estimate the sensitivity of the poverty headcount ratio (measured using different poverty lines) to the inflation rate. Our results point to a statistically significant impact of inflation on poverty, but only when relatively high poverty lines are used. Heterogeneity analysis reveals that the size of this effect is positively associated with country income level, while a substantial statistically significant effect is also found among low-income countries when lower poverty lines are used. Furthermore, unconditional quantile regressions show that the effect is actually largest in the third quartile of the poverty distribution, which suggests the link is particularly strong for upper-middle income countries. These results contribute to the relevant ongoing debate on the consequences of inflation and suggest a rationale for the political popularity boost usually associated with successful disinflations.